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The moment when a company’s founders hand down power to the second generation of managers is fraught with pitfalls.

Blackstone navigated those waters successfully eight years ago, write John E. Morris and David Carey, co-authors of “King of Capital: The Remarkable Rise, Fall and Rise Again of Steve Schwarzman and Blackstone,” which will be published by Crown in October.

With the PE industry maturing, a number of firms face the same issue. Over at FINS.com, Morris and Carey describe how Stephen Schwarzman and Tony James made it work at Blackstone.

In 2002, Blackstone’s co-founder and CEO Stephen Schwarzman found himself stretched thin. Peter Peterson, who formed the firm with Schwarzman in 1985, was 76 and was playing only a peripheral role. Since 1997, Blackstone had doubled to 450 employees, added new businesses and expanded to Europe. Meanwhile, the core buyout business was down to just two seasoned dealmakers. For all intents and purposes, Schwarzman was Blackstone’s management.

Two years earlier, Schwarzman had nearly lured Jimmy Lee, Chase Manhattan’s über-banker, to be his No. 2. In 2002, Schwarzman began talking to another candidate, Hamilton “Tony” James, who was widely credited with building the upstart Donaldson, Lufkin & Jenrette into a leading investment bank and private-equity shop in the 1990s.

It would be a risky proposition for both men. James knew full well that the track record of founder-entrepreneurs handing the reins to outsiders was dismal. Schwarzman, meanwhile, had to gauge the abilities of — and his own compatibility with — someone he had had only fleeting contacts with over the years. It was only after a series of long dinners at Schwarzman’s Park Avenue apartment that summer that Schwarzman was convinced he could trust James, and James was persuaded that Schwarzman was serious about giving him latitude to manage as he saw fit. They also learned that they saw eye to eye on investing.

What emerged from those conversations was a clear mandate. At Blackstone, James was to oversee the entire firm on a day-to-day basis and reinvigorate the private equity and M&A advisory businesses. When he came on board in November 2002, James wasted no time putting his stamp on the firm.

Compared with DLJ and Credit Suisse First Boston, which absorbed DLJ in 2000, Blackstone was a small company. And it was managed by the seat of Schwarzman’s pants.

Read the full article over at FINS.com.

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